In this Spring 2013 edition of The Pulse of Private Equity we continue to assess transaction and deal flow, competitive bidding, debt financing, fund activities and the fund executives' level of portfolio company interaction. We also continue to survey employment projections as well as investment interest in niche markets. Our insights are based on analyzing responses from the same audience — private equity executives — as well as comparing expectations to our earlier research (dating back to 2009) and other market data.

There is a cautious optimism behind every stagnant and declining report — and a rally behind good news and gains. That being said, private equity executives are not betting on significant change — particularly for their own firms. While we've highlighted our findings, we invite you to reach out to us to discuss any details that may be of interest.

EisnerAmper is Pleased to Bring You The Pulse of Private Equity, Version 5.1.

Why 5.1 and Not 6.0?

EisnerAmper has been tracking the views and opinions of senior private equity fund executives in the U.S. since 2009. Twice a year, we deliver an update on market trends and a rolling outlook for private equity activity.

Unlike other surveys on private equity that review the industry from multiple perspectives – private equity executives, service providers, consultants and other commentators – The Pulse of Private Equity is singularly focused on the views of private equity executives.

With survey fatigue setting in, and meaningful change seemingly in a holding pattern, we decided to look at a smaller sample during the end of the 2012 calendar year, while anticipating a more substantial report in early fall 2013.

How is 5.1 Different?

The key difference is that we will be providing only an Executive Summary. We will also preview some new research and trends we've started tracking, such as a comparison between domestic and international executive outlooks.

We continue to assess transaction and deal flow, competitive bidding, debt financing, fund activities and the fund executives' level of portfolio company interaction. We also continue to survey employment projections as well as investment interest in niche markets. Our insights are based on analyzing responses from the same audience — private equity executives — as well as comparing expectations to our earlier research (dating back to 2009) and other market data.

While we've highlighted our findings, we invite you to reach out to us to discuss any details that may be of interest.

Key Findings and Observations

Following the Election Results, Not Much Change is Expected in the First Half of 2013 (1H 2013)

Fiscal Change

Only 4% of domestic private equity executives surveyed felt that fiscal issues, such as the fate of carried interest, would be decided immediately. Almost 63% of respondents felt decisions would occur within the short-term (within the next 18 months). Another 21% felt it would take 18-36 months.

Reflecting this mindset, executives tell us only 27% of their firms have made or are about to implement changes in operations of the funds with respect to portfolio company realization or financing. More than 56% of firms have not or do not expect to make any changes.

Transaction-Related Activities

The majority of United States-based executives did not anticipate much change in the availability of debt financing, acquisitions, sales/exits — or the competitive bidding for these activities in the private equity industry. When it came to their own firms, an even greater majority of executives expected the numbers to stay flat. While approximately a third of respondents did expect to see some increase across the industry, the numbers dropped to under 20% when discussing their own operations. However, when it came to access to debt funding, executives felt their own firms would fare slightly better.

Eighty-two percent of the executives anticipated the number of professionals in their portfolio companies to stay the same; only 5% expected to see an increase. However, in their own portfolio companies, there were a few more outliers: 18% expect a decrease in staff, and over 16% expect an increase.

Execution Remains of Concern

Areas of high interest for investors continued to be in fund management's ability to execute and transparency. In addition, executives continue to stay most involved on the board and with the strategy of their portfolio companies.

There is Not Much Optimism for Deal Activity in the United States, Especially as Compared to International Firms

In terms of activity, 46% of domestic executives surveyed felt deals sourced would remain the same; 25% expected this activity to decline. When asked directly, 23% of these executives felt their firms would do better than other firms when sourcing deals. However, when comparing their specific projections for the industry vs. their firm, the chart below illustrates an even bleaker outlook.

The numbers were even less optimistic when it came to closing deals: 34% of executives expected the overall deals closed in the industry to decline; 41% expected them to stay the same. And, while 18% of U.S. executives anticipated their own firms would close more deals than other firms, the raw projections were grim.

To put these numbers in perspective, we surveyed private equity executives from around the world (primarily based in the United Kingdom, Germany, India and France). Of these respondents, 40% anticipated an increase in deals sourced, industry-wide and 43% expected an increase in deals closed; less than 7% expected to see a decline in deals sourced, while 29% anticipated a decline in deals closed. Perhaps, though, the most telling numbers are in their optimistic expectations for their own performance, as compared to the industry: 67% expected they would outperform the market in sourcing deals; 64% expected they would close more deals.

Analyzing the Differences

With such a varied perspective, we've also started to explore some of the differences. For example, as you may expect, 93% of executives based in the United States were looking for domestic deals. About 10% of respondents also evaluated investments in South America, Europe and Asia.

Eighty-two percent of executives based outside the United States invested heavily in Europe, while about 9% explored Asia, Russia and the Middle East.

While it is not unusual for firms to focus on their own geographical regions for investment, it seems executives anticipate greater overall opportunity in Europe.

Also consider that only 43% of domestic executives, as compared to 64% of international executives, anticipate their teams spending a high amount of time looking for or working on new transactions.

Money Matters

As private equity firms are finding many of their current funds going stale, it is important to understand where to source investments for new funds.

It should be no surprise that the majority of firms in the United States plan to look at domestic investors. However, close to a third of the executives are also looking for money from Europe and Asia. International executives anticipate that Europe will lead investors, followed by the United States. Expectations for investments from Asia fall behind the States by almost 30%.

Family offices are the key source of anticipated investments, exceeding the second place alternative, institutions, by almost 20%, with both domestic and international executives.

The Great Divide

International executives have a very different outlook on sectors for investment than executives operating in the United States.

A Common Theme: Uncertainty with Cautious Optimism

The past year was filled with dizzying financial and political crises, devastating natural disasters and crime. The markets — and the people behind the markets, analyses and commentary — are looking for hope. There is a cautious optimism behind every stagnant and declining report — and a rally behind good news and gains.

That being said, private equity executives are not betting on significant change — particularly for their own firms. As we begin another survey soon, we will continue to explore this sentiment.

Have Questions or Comments?

If you have any questions about this media item, we'd like to hear your opinion. Please share your thoughts with us.

EisnerAmper LLP is among the nation’s largest full-service advisory and accounting firms. We provide audit, accounting, and tax services, as well as a complete suite of professional advisory services to a broad range of clients across many industries. We work with businesses of all sizes, including more than 200 public companies, as well as with high net worth individuals and family offices. We serve thousands of financial entities spanning the hedge, private equity and venture fund space, along with broker dealers and insurance companies. As companies grow we help them reach their goals every step of the way.